QUESTION: We have decided to provide some of our employees with cell phones for calls related to our company’s business. We expect that employees will sometimes also use those phones for personal calls. Will those employer-provided phones be a taxable fringe benefit? Could we instead reimburse employees on a nontaxable basis for business use of their personal cell phones?
ANSWER: Business use of an employer-provided cell phone may be treated as a nontaxable working condition fringe benefit so long as the phone is provided “primarily for noncompensatory business purposes.” Examples of noncompensatory purposes include the need to be accessible to the employer at any time for work-related emergencies, or to be accessible to customers outside of normal business hours or when away from the office. If the primary purpose requirement is met, the value of any personal use of the employer-provided cell phone will be treated as a nontaxable de minimis fringe benefit. An employer-provided cell phone is not provided primarily for noncompensatory business purposes—and results in taxable income—if the phone is provided as a substitute for compensation, to attract new employees, or to promote employee morale.
The IRS has indicated that reimbursement of employees’ expenses for their personal cell phones will be analyzed in a similar manner. Reimbursements should not be considered additional income or wages if—
the employer has substantial business reasons for requiring employees to use their personal cell phones and reimbursing employees for that use;
the reimbursements are reasonably related to the needs of the employer’s business and reasonably calculated not to exceed the expenses that the employee actually incurred in maintaining the cell phone; and
the reimbursements are not a substitute for a portion of the employee’s regular wages.
Thus, if an employer reimburses an employee for a monthly basic cell phone plan that charges a flat rate per month for a specified number of minutes of domestic calls, and some of those minutes are used for personal calls, the portion of the cost attributable to personal use can be deemed de minimis if all three requirements are met.
These rules also apply to “similar telecommunications equipment.” While IRS guidance has not provided a complete definition of that phrase, the IRS has affirmed that it includes tablet devices.
For more information, see EBIA’s Fringe Benefits manual at Sections VII (“De Minimis Fringe Benefits”), XXIII.B (“What Is a Working Condition Fringe?”), and XXIII.D (“Cellular Telephones”).
Contributing Editors: EBIA Staff.